'08 shaping up as boom year for proxy battles

April 08, 2008|By Mike Hughlett, TRIBUNE REPORTER

Motorola Inc.'s peace treaty Monday with investor Carl Icahn is emblematic of a trend this spring: Proxy battles could reach record levels. But many companies are finding it's not worth the time and expense of a fight, particularly when dissident shareholders have the upper hand amid a weak landscape for companies.

"They count the votes and realize they'd probably lose," said Charles Elson, director of the University of Delaware's Weinberg Center for Corporate Governance.

All the ingredients for a big crop of proxy fights are in place this spring, Elson said. There's falling stock prices, a weakening economy and aggressive hedge fund managers looking for downtrodden but still valuable stocks.

Patrick McGurn, special counsel for RiskMetrics Group, said the number of dissident shareholder demands tracked by his company so far this year has been higher than ever. RiskMetrics, formerly known as Institutional Shareholder Services, advises large investors on corporate governance issues.

More than 200 "contested solicitations" -- shareholder resolutions not approved by management -- have been filed this year. "That portends to offer a record-breaking season," McGurn said.

Activists see success

Randall S. Thomas, a law and business professor at Vanderbilt University's Law School, said shareholder activism has been steadily rising since 2001 and much of it is being driven by hedge funds, lightly regulated capital pools that serve wealthy people and institutions.

"They are very successful," said Thomas, who has studied hedge-fund shareholder activists. "Two-thirds of them get all or most of what they are seeking to get."

Usually, hedge fund activists are seeking board seats and some sort of change in corporate strategy, from buying back more stock to selling off parts of a company.

A big hedge fund player, Icahn targeted Schaumburg-based Motorola last year for a typical reason: It seemed to be an undervalued company that, in his opinion, wasn't deploying its cash wisely. It turned out that Icahn bought into a firm that was in far worse shape than anyone at the time thought, and for many months since he had been pushing for a breakup.

Last month, Motorola announced it would split into two companies.

On Monday, Motorola said it would immediately appoint Keith Meister, one of Icahn's nominees, to its board of directors and back a second Icahn candidate at its shareholder meeting in May. Motorola had been opposed to Meister's election to the board.

With a depressed stock market and antsy shareholders, many corporate boards are forging agreements with activists rather than risking defeat in nasty, public fights. "Frankly, a lot of boards are just cutting their losses early and getting out," said RiskMetrics' McGurn.

Take the board of The New York Times Co. Last month, it chose to avoid a proxy fight with a pair of its hedge fund investors and agreed to give them two board seats, the first time in 41 years the company had accepted directors nominated from the outside.

Nashville-based O'Charleys Inc., a restaurant chain, was another company that recently chose to settle rather than fight. It awarded three board seats to a New York-based hedge fund that owns a 12 percent stake in the company.

Kraft brokered truce

Closer to home, Kraft Foods in November acted well before the proxy season to broker a truce with its own maverick shareholder, Nelson Peltz. Kraft added two Peltz-backed directors to its board, and Peltz agreed not to launch any public campaigns against the company until its current turnaround plan plays out.

By doing so, Kraft avoided a proxy fight, which can cost millions of dollars as management and activists trade barbs in regulatory filings and advertisements.

"It's costly in more ways than just financial," Vanderbilt's Thomas added. "It's a big disruption for company management."